Smartphones have taken over the world. If you went back 20 years and claimed most people wouldn't be using the internet from personal computers -- and instead from connected phones that fit in their pockets -- you would've been laughed out of the room.
But truth, as they say, is often stranger than fiction. And two of the leading companies behind this movement are the subject of today's match-up: smartphone manufacturer Apple, and the maker of the Gorilla Glass on many such phones, Corning.
Image source: Getty Images.
But which is a better bet at today's prices? If we look at the question from three different angles, I think it's easy to see why one stock is a better bet than the other.
Financial fortitude
When it comes to financial fortitude, the No. 1 thing I want to know -- as a long-term, buy-to-hold investor -- is how a company would be affected by a financial crisis.
It doesn't really matter if the crisis is macro or company-specific in nature, there are three different camps a company can come down in: the fragile, the robust, and the antifragile. You can find out more about these three distinctions here.
Keeping in mind that Apple is valued at almost 40 times the size of Corning, here's how the two stack up.
| Company | Cash | Debt | Free Cash Flow |
|---|---|---|---|
| Corning (GLW 3.64%) | $3.4 billion | $4.8 billion | $38 million |
| Apple (AAPL +3.24%) | $267 billion | $101 billion | $54 billion |
Data source: Yahoo! Finance. Cash includes short- and long-term investments. Free cash flow presented on trailing-12-month basis.
Even after adjusting for size, it's clear that Apple is in a stronger position. Not only does it have the largest cash balance the world has ever seen -- worth more than a quarter-trillion dollars -- but Corning has a net negative cash position.
In addition, Corning's cash flow is not very impressive. That's mostly due to the fact that the company is making large capital investments right now for the future of the business. That's a good move in the long run, but it introduces a level of fragility over the short run should any type of crisis hit.
Winner: Apple
Valuation
Next we have valuation. Because there's no litmus test to definitively tell you whether or not a stock is expensive, I like to consult a number of different data points.
| Company | P/E Ratio | P/FCF Ratio | PEG Ratio | Dividend | FCF Payout |
|---|---|---|---|---|---|
| Corning | 17 | 600 | 1.6 | 2.6% | 1,700% |
| Apple | 18 | 17 | 1.2 | 1.6% | 24% |
Data sources: Yahoo! Finance and E*Trade. P/E calculated using non-GAAP earnings where applicable.
If we go simply based on the most popular valuation metric -- P/E -- we've got a pretty close battle. But by peeking underneath the hood, we see that this isn't as close as it appears.
Because of the aforementioned capital expenditures, Corning's free cash flow is very low. That leads to a sky-high P/FCF ratio and a dividend that appears unsustainable. While fellow Fool.com contributor Matthew Cochrane makes a compelling argument that Corning's expenditures will more than pay for themselves to help the company meet demand for its goods, these dynamics clearly put Corning in a trailing position behind Apple.
Not only does Apple have a much more sustainable dividend payment -- it only eats up one-quarter of the company's free cash flow, meaning there's tons of room for growth -- but even after accounting for growth prospects (via the PEG ratio), Apple appears to be trading at a discount.
Winner: Apple
Sustainable competitive advantage
But I have saved the most important aspect for last: the strength of each company's moat.
At their core, each of these companies is a manufacturer. Traditionally, such players rely almost exclusively upon scale to lower prices, and patents to protect trade secrets. In this day and age, those aren't the most powerful moats to rely upon.
But there's more to the story than that. According to Forbes, Apple has the most powerful brand in the world -- worth over $180 billion. That's an important differentiator, as end users don't really care who makes the glass on their smartphones so long as it's functional. Many do, however, care about the brand of their phone.
Corning, however, does have some nuanced moats of its own. Because of the contracts it has in place with telecom companies for its optical communications products, there's guaranteed revenue that will be rolling in over the next few years. And the years of capital expenditures it has made have allowed Corning to be the low-cost provider of fiber-optic cables, which these telecom players use.
Apple, though, benefits from more than just brand value as well. Because all of a person's iDevices are synced with one another in the cloud, there are moderately high switching costs involved with getting a non-Apple device: You lose access to your apps and stored data. For some people, that's a big deal.
So which is more valuable: Apple's brand and high switching costs, or Corning's longer-term contracts and low-cost advantage? Personally, I think it's too close to call, so I'm designating this a draw.
Winner: Tie
And my winner is...
While both companies have moderately wide moats, Apple's financial fortitude and valuation give it the advantage here.
That being said, I recently sold all of my Apple shares because I simply believe that its moat isn't as strong as those of other investment opportunities out there. That's why I haven't given either company an outperform rating on my own CAPS profile.
